January 24, 2002 4:15 PM PST

Gateway sees sales plummet, axes jobs

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PC maker Gateway on Thursday confirmed a steep drop in fourth-quarter sales, announced more job cuts and store closures, and said it would reduce PC prices.

Gateway is cutting 2,250 jobs, or more than 15 percent of its remaining work force, a Gateway representative said. In addition, the company will close 19 underperforming stores, including 10 in California. Before Thursday's announcement, there were 296 stores.

As previously reported, the company is again slashing its work force in its latest attempt to restructure amid a prolonged drop in sales and market share.

Gateway also said it would try to improve sales and gain market share through more aggressive pricing on its PCs. As a result, the company said it expects to post losses, excluding charges and taxes, for the next several quarters.

For the fourth quarter, the company reported earnings, including a one-time gain from retiring debt, of $9.4 million, or 3 cents per share, on revenue of $1.1 billion. That compares with a loss of $128 million, or 40 cents per share, on sales of $2.4 billion in the same period a year earlier.

Excluding the gain, fourth-quarter earnings were $5.1 million, or 2 cents per share. On that basis, a consensus of analysts was expecting a profit of a penny per share, according to First Call.

However, Chief Financial Officer Joe Burke acknowledged that the profit came at the expense of market share. Although the company acheived profitability in the fourth quarter on lower sales, Burke told CNET News.com that it cannot sustain that scenario long term.

"It cost us to achieve that profitablity," he said. "We've forgone some market share. Long term, we need both."

The Poway, Calif.-based PC maker said earlier this month that it would meet its goal of profitability for the October-to-December quarter, excluding taxes and charges, but would fall considerably short of its sales goals. The company said sales would be in the neighborhood of $1.16 billion, with unit sales dropping 15 percent from the preceding quarter, despite the fact that the fourth quarter is typically the strongest one in the PC industry.

CEO Ted Waitt said in a statement Thursday that the company can cut prices and post losses this year and still exit 2002 with $1 billion in cash.

see special report: Gateway CEO's painful homecoming "We have the liquidity and financial resources necessary to forgo short-term profits to regain long-term growth and sustainable profitability," Waitt said.

On a conference call, Waitt played the roll of cheerleader.

"The first way we are going to grow our business is through good old-fashioned leadership--leadership at every price point," he said.

Waitt then offered details on several new computers, including a $599 PC the company introduced earlier this week. Waitt said that on Monday, the company will introduce new laptops, including a $999 machine with 256MB of memory, a 14-inch screen and a DVD drive. He also said the company plans to introduce a $499 server.

Gateway is closing operations at four locations, including technical support facilities in Rio Rancho, N.M., and Colorado Springs, Colo., as well as a Web sales office in Beverly, Mass., and a marketing, adminisitrative and engineering facility in Lake Forest, Calif.

In addition, the company is cutting jobs at its facilities in Poway, Calif.; North Sioux City and Sioux Falls, S.D.; and Hampton, Va. The company is also laying off workers in Kansas City, Mo., and Denver.

In August, Gateway slashed its overall work force by 25 percent and closed overseas operations, as well as manufacturing and support facilities in the United States. Last March, the company closed 27 Gateway Country stores, or 10 percent of the retail outlets.

Gateway said it would take restructuring charges of $75 million to $100 million in the first quarter.

Gateway's latest decision to cut prices will likely prolong the more than year-long price war that has been wiping out profits in the PC market.

Toward the end of 2000, Dell Computer began to aggressively cut prices in an effort to gain market share. The company's actions largely decimated desktop profits at companies such as Compaq Computer and helped accelerate consolidation in the industry. Micron Electronics changed hands in March 2001. And on Labor Day, Hewlett-Packard announced plans to acquire Compaq. Gateway, meanwhile, has been losing market share since late 2000.

News.com's Michael Kanellos contributed to this report.

 

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